August 2012

08/31/2012

Same-sex couples raising children must stand ready to prove to the world they are a family, just one that happens to have two mothers or two fathers.This constant burden of proof is especially difficult for families … who live in a state that doesn’t allow them to establish legal ties to each other.

“Marriage” is one word that presents practical problems when it comes to same-sex couples, let alone the words “family” or “children.”

Take, for example, the legal complications surrounding same-sex unions as recently explored in The New York Times. The article, titled “A Family With Two Moms, Except in the Eyes of the Law,” found that many same-sex couples do start families and do bear children. As a result, very careful estate planning is essential, especially given current state and federal laws.

For any couple with minor children, fundamental estate planning focuses on providing backup parents (i.e., guardians) to raise them and trustworthy stewards to protect their inheritance. When it comes to same-sex couples, making such provisions for minor children likely means navigating a dicey web of laws that may (or may not) tilt in their favor.

To make matters even more complicated, a simple relocation from one state to another may upset your comprehensive estate planning and require a top-to-bottom review of your existing estate plans.

In the end, not only must you fully define your own legal structure, but you must also do so well in advance and make changes as they inevitably occur in the law and in your life.

08/29/2012

The American Farm Bureau Federation said it concurs with a Joint Economic Committee report, "Costs and Consequences of the Federal Estate Tax," released Wednesday that details the financial harm posed by estate taxes on family businesses.

It’s a simple equation. What you own and how you own it will determine your estate tax liability. Every taxpayer should make plans to reduce this liability, especially if you have a family farm. Otherwise, you may lose the farm to pay the taxes.

The Joint Economic Committee recently released a report on the devastating power unleashed upon the farm when an estate tax is triggered. Simply titled “Estate Tax Report Released,” the committee also considered the broader impact on the economy.

The report, approved by the American Farm Bureau Federation and examined in Farm Futures, notes that, while farm owners may have a great potential wealth … such wealth is tied up in land (an illiquid asset) and is not necessarily cash-in-hand.

However, the Internal Revenue Service doesn’t accept soil in payment. However, the IRS will hold you accountable for the estate taxes due on your land, even if you have to sell the land to pay for it.

"When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners are forced to sell illiquid assets, such as land, buildings, or equipment to keep their businesses operating," said AFBF President Bob Stallman. "With 88% of farm and ranch assets illiquid, producers have few options when it comes to generating cash to pay the estate tax."

If you (or a loved one) own a family farm, then there is no time like the present to make proper estate plans to protect and preserve the farm and the family wealth it represents. You have worked hard to make a living from your farm. Isn’t it common sense to spend some time and money protecting and preserving it?

08/27/2012

Can you imagine spending half of your working life in a family business, beside your mother, father, and brother, and all getting along? And then spending the next half of your work life with your brother, your spouse, your four sons and three nephews, and still all getting along? I pinch myself. We have been able to create an environment of mutual respect and trust, one where we can function as a team that shares the emotional and intellectual challenges of business along with its financial rewards.

How do you successfully transfer your family business within your family? It can be a tricky situation. One successful trick that CNNMoney recently highlighted is the power of rules.

The article, titled “Family business: How to pass the baton,” is a story about the Mitchell family and the rules they developed to keep their family, as well as their business, intact. As the article illustrates, rules are a way of promising to yourself and future generations that you’ll maintain a strong shareholder’s agreement, operating agreement, or other founding document of the business itself.

So, what guidelines will help keep your family together and in business at the same time? For some practical ideas, consult the original article for the “Mitchell” rules and consider how they might work for you family business.

08/24/2012

Inheriting money would seem like one of life’s unabashed blessings: someone gives you a lump sum just for being you. For the rest of us, inheritors seem like a democracy’s version of royalty: born into a world of privilege we would love to know. Yet the inheritors I spoke to said they were ill equipped to handle the windfall and found that it quickly made them feel separate from their peers.

While the decision to leave wealth to your loved ones is typically an easy one, more difficult issues can be what to leave, to whom, and how. To further complicate matters, you should be asking yourself a couple of questions. Should you talk to your loved ones now about your plans and their future inheritance? If yes, then how and when should you talk about the matters?

Fortunately, The New York Times has addressed these circumstances with an article titled “What to Tell the Children About Their Inheritance and When.” Unfortunately, the article does not solve these inquiries for you. The questions of if, how, and when to inform your heirs are solely yours to resolve. They are entirely dependent upon your and your loved ones’ unique circumstances.

Nonetheless, the article does provide firsthand accounts of others’ similar situations. It seems as if more and more heirs actually want to know what is going on, and some even need to know for various reasons. Either way, there are risks involved.

A sensible approach would be to seek the counsel of your estate-planning attorney who undoubtedly can provide experience-based insights. It is prudent to learn from the successes and mistakes of others.

08/22/2012

Estate planning is critical to make sure your assets are passed down as you wish. But another component of estate planning for couples is making sure that the surviving spouse has enough money to live on.

Most married couples want to ensure that all of their resources are available to provide for the surviving spouse, upon the first death. However, without careful retirement planning now, surviving spouses could find themselves in a “cash flow” pinch just when they need income most.

Estate planning is a process with many moving parts. While much focus is given to saving estate taxes, avoiding probate, and transferring wealth between generations, failing to incorporate retirement planning can be hazardous to your wealth.

This estate-planning dilemma was the centerpiece of a Kiplinger’s study recently featured in the Chicago Tribune. The article, titled “Retirement: An estate-planning pitfall,” brought to light the difficulty of lost income to surviving spouses. The first spouse’s passing often disrupts what the couple had always taken for granted financially – predictable cash flow.

The article reviews sources of income impacted by this first death, including social security and pensions. As with all aspects of estate planning, it is crucial to understand the importance of getting competent counsel in advance. In fact, couples should investigate the impact of death on cash flow while both are alive in order to avoid unpleasant surprises later.

08/20/2012

For many owners of artwork or decorative collectibles, scenario planning works well for individual or a small number of items.

Estate planning is a process, not a “one-and-done” event. Sometimes anticipating future curveballs in life may necessitate weaving scenario planning into your estate planning.

As the expression suggests, scenario planning requires thinking through “if, then” events. A recent example of such planning comes to us in the form of the Ilena Sonnabend estate and the Rauschenberg painting, “Canyon.”

If you have been following this saga in the press, then you know “Canyon” is a mixed- media work (to say the least) that features the preserved remains of a bald eagle. Before you rush out to acquire a similar piece for your own collection, be forewarned: It is only legal to own such “media” with special permission, and it is outright illegal to sell it.

Hoping to make the best of that odd twist of legal fate, estate advisors counted the work as an asset without value for estate tax purposes upon Sonnabend’s passing. Unfortunately for the estate, the Art Advisory Panel cried foul and pegged the value at $65 million, even if it couldn’t be sold in the U.S.

While a chorus of critics rose up against the heavy-handed IRS for this draconian valuation, a recent article in Forbes has a different take. Titled “'Canyon' Controversy - Blame The Advisers Not The IRS,” the author blames the estate advisors and the lack of scenario planning.

In this situation, the main contingency happened to be the very object the estate advisors were giddy to exploit. They targeted the apparent lack of resale value of the art piece. As the article notes, this case should serve as an example to estate advisors and their clients regarding the value of scenario planning, especially in the current economic, tax and political climate.

08/17/2012

Members of the armed forces about to be deployed have a lot on their minds, but one thing on the checklist needs to be making sure their legal and financial affairs are in order. With a little planning, servicemen and women deployed overseas can serve their country with the peace of mind that comes from knowing that their family and their future security are provided for.

For too many of us, the necessities of estate planning are easy to forestall. However, for a military family, the exigencies of the present are too great to ignore. Proper planning is an immediate concern.

Essentially, military plans always are based on battlefield “contingencies.” Whether over there or on the home front, changes on the “battlefield” are hard to predict. For example, for a deploying soldier (sailor, airman, marine or coast guardsman), have you secured enough life insurance to provide for your family? If yes, does your life insurance specifically carve out war, war-risk, service casualties, and the like as exclusions? Regardless, make sure you maximize any government-offered life insurance, as it does not exclude such risks.

Ultimately, do not ignore making proper estate plans as well. Be sure to coordinate your estate planning with the beneficiary designations on your life insurance and other assets.

08/15/2012

Depressed Medicare beneficiaries in the so-called coverage doughnut hole were more likely to cut back on their antidepressants than those who had full insurance coverage, a study has found.

Even with the Affordable Care Act (ACA) – Obamacare by any other name – the costs paid and lifestyles lived by many is being tied to the “doughnut hole.” This especially is true for seniors taking depression medications.

As recently reported in Med Page Today, a new study by Yuting Zhang, PhD, of the University of Pittsburgh, Medicare may not fully cover depression medications for seniors, despite the ACA. The article is titled “Antidepressants 'Fall' Through Doughnut Hole.”

If you are unfamiliar with the “doughnut hole” issue, you are not alone. It is the coverage gap created by Medicare Part D. For those whose income is at the lower end, there tends to be coverage. Likewise, for those who have an upper-end income, there is still coverage… with a gap in between.

According to the new study, and sheer intuition, patients that fall within the doughnut hole are associated with a significant drop in medication use – 12% on average. That is always relevant, but perhaps especially so in the case of depression medication. While discontinuing any prescribed medication is never advisable, it is often easier to justify foregoing depression medication than other medications.

I certainly recommend reading the original article for more details regarding this study, should this issue be relevant to you or someone you love.

08/13/2012

Estate planning tends to focus on minimizing taxes, especially for high-net-worth individuals, but personal problems may be more pressing for some clients. For such people, the success of the planning process hinges more on dealing with their issues than with their legal, tax and technical matters.

Of the three essential elements to any estate plan, namely, the legal, the financial, and the human factor, the latter can be the most difficult. This challenge was the subject of a recent article in Financial Planning appropriately titled “The Human Factor.”

Generally speaking, the human factor in any estate plan is the sum total of your personal, interpersonal, and family relationships and problems. Planning for these matters means taking everything you know and everyone you love into consideration. While the details will vary according to your own unique circumstances, the Financial Planning article provides some practical guidance.

For example, have you considered the needs of yourself or your spouse (if married), should old age catch up with you physically or mentally? What about the potential of a likely heir having spendthrift tendencies or a substance addiction? Have you given thought to heirlooms and other items of tangible personal property that could trigger family feuds in the absence of clear inheritance direction?

Is that all? Hardly. It does, however, help to get you (and me) thinking about the “human factor” when it comes to our estate planning.

08/10/2012

In today's tough economy, you may decide to loan money to a cash-strapped family member. While this may be a noble cause, please take my advice and make the loan the tax-smart way.

Sometimes ensuring that a loved one has the assets they need – for a project or just for general use – will mean that you’ll be treading a fine line between making a “gift” and making a “loan.” The problem is that these are very different concepts, especially as far as the IRS is concerned.

In brief, if you’re going to make a family loan, make it a real one or else consider an outright gift to be taxed by the IRS accordingly.

The fine line between a loan and a gift is not a new one. This topic was explored in a recent article in SmartMoney titled “Making a Tax-Smart Family Loan.” Essentially, you need to remember that “loans” are what you make when when you aren’t interested in losing money and are probably trying to gain. To be a loan, the transferred amount must come with a standard interest rate. In fact, to be considered a “loan” the interest rate must be at least equal to the “applicable Federal Rate,” as determined monthly by the IRS.

If you don’t charge the objective rate of interest, then you’ve essentially given that much away. Not surprisingly, that’s exactly how the IRS chooses to view the situation and, in return, it will hold you accountable for the interest not charged. As a result, this imputed interest can eat into your gift tax exemption amounts, whether annual or lifetime.

Essentially, no loan to a family member should be considered a strictly off-the-books and casual affair. If you find yourself caught between making a gift or a loan, then you must choose one or the other and properly frame the transfer as such.